The Magic Number
Forget about losing that last 10 pounds. Want to really make a difference in your life? Start saving 10 percent of your income.
As New Year’s Resolutions go, this one isn’t all that different than the ever-popular “I will fit into my skinny jeans!”: It involves sticking to a budget (money in this case, not calories), resisting urges (the call of the shoe department, not the whiff of a fresh Danish) and making lifestyle changes that ensure you’ll not only save that money, but not touch it once you do.
The average personal savings rate in the United States is about 5 percent, according to the Bureau of Economic Analysis. Armed with the right strategies, however, you can find a way to save 10 percent. Here are eight strategies to help you.
Lock Away Your Savings
OK, we’re not saying to put it in a safe. Rather, lock away your savings in someplace even harder to access: a brokerage account or an online savings account. Transfer your money then train your brain to know this is your “Can’t Touch This” savings account. But because few can be trusted to keep that silent pledge, these two savings techniques can help you adopt a hands-off philosophy on your savings.
“Put your savings into an account that is not linked with your checking account,” says Kimberly Foss, CFP, founder and president of Empyrion Wealth Management in Roseville, Calif. “That creates one barrier to entry so it’s not that easy to get to.”
I deposit my savings into an online bank that is a different institution than where I house my checking account. Moving the money is easy — a few mouse clicks and it’s done. But withdrawing is hard. My savings bank has a 48-hour wait period between when you request a transfer and when the money appears in my checking account. So if I need money today, my long-term savings account isn’t going to help me. And by giving me two days to think about whether I really need to dip into my savings, I’m less likely to do so.
The same goes with a brokerage account. If you’re investing your money, odds are you’ll have to call your broker or other representative to have her make the withdrawal. Having to justify tapping your investments to your money manager might just make you shy away from withdrawing in the first place.
Automate Your Savings
One of the easiest ways to save money regularly is to do it passively. In fact, in nearly 20 years of building and quickly depleting savings accounts, I can attest that this is the only method that has worked for me.
How do I do it? On the day my husband’s paycheck lands in our account, my online savings account instantly grabs 10 percent of it. Same thing goes when I get a client check. So by the time we see the money, the savings has already been tucked away. Out of sight, out of pocket. If it’s not there, we can’t spend it.
Make a List and Stick to It
Write down a list of what you’re allowed to use your savings for and what you’re not allowed to use it for. That 40 percent off sale at Banana Republic? No, never, no matter how badly you think you need a new cocktail dress. But the unexpected car repair or root canal? Yes.
“It is not a ‘want’ thing,” says Foss. “It’s not, ‘I really want that coat,’ or ‘We really want to go on vacation.’ Want-funds like vacation savings need to be separate accounts.”
Work Your Way Up
If you proclaim, “I’ll lose 10 pounds in a month!” you’ll either fail or gain it all back pretty quickly. That’s because you’re making short-term changes that are not sustainable in the long term.
Saving 10 percent of your income might seem impossible right now. It’s so much money! If so, start with 2 percent. Do that for two months and then increase it to 3 percent. Before you know it, you’ll be at 10 percent and won’t have suffered the sting of instantly having to seriously restrict your budget. Instead, you figure out how to do it slowly over time.
“Start out wherever you can to be successful,” says Foss. “If that’s 2 or 5 percent it doesn’t matter.” Then create a visual that will inspire you on a regular basis, she says. Create a bar graph and update it weekly, showing how much closer you are getting to your savings goal. Your first goal should be an emergency fund of three to six months of expenses or more. Then start funding your 401(k) and individual retirement accounts (IRA). “Put the bar graph on the mirror in your bathroom or on your refrigerator so every day you can see your successes.”
Find Savings Everywhere
Get an unexpected tax return check? Don’t head to the mall — deposit it in your savings account. Did your auto insurance premium come down? Deposit that difference in savings. Even if it’s just a few dollars here and there, it will add up.
Get a gift card that you won’t be using? Sell it online. At CardCash.com, a $50 Wal-Mart gift card can be exchanged for $46, and you can use PayPal to deposit that money directly into your “Can’t Touch This” savings account. Think of other small windfalls you get (overtime pay, an annual bonus), and instead of figuring out how to spend them, save them.
If you have trouble sticking to a budget that allows you to squirrel away savings, consider living like your grandparents did and use cash to pay for expenses such as groceries, gas and dining out.
“The problem we have with money is that we don’t touch it or feel it anymore,” says Melody Juge, founder and managing director of Life Income Management and founder of Juge Girls, a social network for women. When you’re on a strictly cash budget, suddenly blowing $4.50 on a latte seems wasteful if you’ve only got $40 to get you through the week. When you have to part with those greenbacks yourself, a basic cup of black coffee sounds just right. Or even better: a cup you brew yourself at home.
People often hear the word “budget” and gristle. To budget is to feel deprived, right? Not necessarily, says Juge. You can still figure out how to maintain your lifestyle while spending less. When you go out to eat, drink tap water rather than an expensive beverage. Find restaurants that allow you to “BYO” so you can bring your own bottle of wine. Lower your thermostat a couple of degrees and put on a sweater to compensate. “If you’re used to eating out for lunch every day, change that to once a week,” Juge says. “Before grabbing a cab, consider if you can walk instead.”
Every little bit helps you get closer to your 10 percent goal.
Visualize Your Goals
Get out the scissors and glue sticks and embrace your inner grade-schooler. Make a vision board that you can dream on when you feel discouraged, says Juge. If you’re saving for an emergency fund, maybe your vision board is filled with inspirational quotes (“A penny saved is a penny earned.”) or words such as confidence, relaxation, assuredness. If you’re saving for retirement, clip out pictures of your dream retirement life: theater tickets, a condo in a warm locale, travel. If you’re saving for your kids’ college, cut out logos of universities they might attend if you are able to save enough.
“Remember that you are working for you. You're working for your future. You have to put the future there and visualize it,” says Juge.